MSU economist peers into crystal ball and sees? …

As Michigan faces a new decade, its economic future remains uncertain.

Charles Ballard, an author and a professor of economics at Michigan State University, spoke with Crain's Detroit Business on the state's current economic condition, the loss of manufacturing jobs and what sectors could see growth, declining property-tax revenue, dealing with a nearly $2 billion budget shortfall and Michigan's unemployment.

Ballard, who has been a consultant to the U.S. departments of Agriculture, the Health and Human Services and the Treasury, has written about the state's economy for years. His books include Michigan at the Millennium, Michigan's Economic Future and Michigan's Economic Future: A New Look.

What is your general overview of the current condition of Michigan's economy? Is it growing, will it add jobs and will the state stop losing population?

We've had a very tough decade, especially the period of the last four or five months of 2008 and the first six months of 2009 were really rough. There were huge job losses during that period. Since then, we've sort of been flat.

There are some hopeful signs. My prediction — and of course predictions are notoriously tricky — is that we will see at least a little bit of job growth and a little bit of income growth in 2011. It will not be anywhere close to big enough to make up the losses in employment in the last decade.

The total number of people employed in the state is about 18 percent lower now than it was at its peak in the summer of 2000 — that's more than 800,000 jobs. If we make up 20,000 jobs in 2011, that will be good. But that barely makes a dent in the 800,000.

In terms of population, we've had five years in a row of population losses. I'm cautiously optimistic that the economy will stabilize to the point that we won't lose a whole lot more population over the next several years. But I don't think we'll be gaining population, either, and we may have some further losses.

What are some examples of local economies/interesting case studies in pockets around the state — silicon in Saginaw, medical investment in Grand Rapids? What are some geographic points of interest?

I think that the solar stuff in Saginaw Valley is a really bright spot. There's a local company called Liquid Web that, as I understand it, is doing very well here in the Lansing area. Health care, just generally, is growing. In this awful decade that we've been through, health care employment increased.

Genesee County, and Flint, is sort of the poster child for a metropolitan area in Michigan that has taken it on the chin the most. West Michigan is an area that has done relatively well. Southeast lower Michigan has had it difficult with the shrinkage of the auto sector.

The four nonmetropolitan counties that do best — actually have pretty high per capita incomes relative to the rest of the state — are Leelanau, Grand Traverse, Charlevoix and Emmett. All of them are up in the northwestern part of the Lower Peninsula. They've got affluent retirees, a physically beautiful place, so they have the tourism.

What sort of numbers do you have about adding or losing manufacturing jobs? Which sectors do you think will show job growth?

In the last 10 years, Michigan lost almost exactly half of its manufacturing jobs — about 450,000 jobs lost. In the auto sector, it was more than half of at least the production jobs — more than 200,000.

I'd like to emphasize that the auto sector in Michigan doesn't have to grow for Michigan's economy to grow. All we have to do is for it to stop shrinking. Because if the shrinkage of manufacturing in general and autos in particular, that's the thing that's exerted such a huge downward pull on the whole rest of the economy.

What are your thoughts on the impact of declining property-tax revenue for municipalities and school districts over the next two years? Do you think there will be a flood of emergency financial managers put in place?

Because property taxes are so important for a lot of local governments, the shrinkage of property-tax revenues is really, really putting tremendous pressure on them. I've talked to an Oakland County commissioner who said their (property tax) revenues won't get back to 2008 levels until 2022. So we're not talking just a couple of years.

Part of that is because Proposal A (which was passed in 1994 and offered property-tax relief to home owners) puts in a cap on taxable value. Your taxable value of the home can only grow at 5 percent or the national rate of inflation, whichever is lower. In every one of the years since Proposal A, the rate of inflation has been below 5 percent — it's been numbers like 2 percent.

So, then what happens if you have a big decrease in property values, the beginning point for that gets reset at the lowest point for the property values. Even if property values rebound strongly, tax revenues won't catch up. By that part of Proposal A, unless it's changed, we've sort of locked ourselves into a sort of perpetual budget problems, especially for the local governments.

I think it would be good if the state government would preserve the revenue-sharing for local governments and maybe even expand it. If they don't, a lot of the local governments just don't have the revenues to put what I consider to be pretty essential services on the streets.

I think there's a decent chance that we may have more local units basically going into receivership and having an emergency manager.

How can Michigan attack its $2 billion budget shortfall?

A lot of that is up to Gov. Snyder. Right now, there's a lot of anti-public-sector sentiment all across the country, not just in Michigan. But I'm just trying to remind people — legislators and governor included — that we've already made huge cuts in some of our programs, especially in the general fund

The general fund is mostly higher ed, Medicaid, social services and prisons. The general fund budget, adjusting for inflation, is down by more than 40 percent. And most of the $1.8 billion shortfall for fiscal 2012 is in the general fund budget. The school aid fund, for K-12 schools, is in somewhat better shape than the general fund.

If we do balance the budget exclusively through further spending cuts, we'll get to the point where a lot of the services that I think are really important for Michigan just simply can't be provided.

Of course, if you take my advice and don't (balance the budget) exclusively through spending cuts, then that means you've got to tackle the always politically difficult tax issue. It takes wisdom and courage to talk honestly with the people about taxes.

If it were up to me, I would certainly extend the sales tax to a lot more services and entertainment than they are now. I know that's not easy politically, and it may not happen.

What are your projections for state unemployment in the next year or two?

I think that the most likely scenario is that unemployment will continue to edge downward. I'd like to see it below 12 percent in the next year. I think there's a good chance that could happen, but I don't think it will get down to single digits. I hope it gets down to single digits, but I think it's probably going to take a few more years before that happens, unfortunately.

What are the biggest fundamental changes the state still needs to work on to retrain the workforce and working on the perception problems that haunt the state on a national level?

I put this huge emphasis on education, and it's really from cradle to career and beyond. Michigan Works plays a very important role; community colleges play an important role in retraining for the new jobs.

Moreover, look into the long haul of just the basic education. We need to have kids who get out of high school and really have 12th-grade education. Unfortunately, many of our Michigan children really only have about a 10th-grade education when they're done.

As for the perception problem, the reality has been tough, but the perception that the rest of the country has about Michigan is far worse than the reality. When the rest of the country thinks of Michigan, they think of abandoned factories and warehouses. And we do have some of those, but we also have so many assets.

I'm a huge supporter of the Pure Michigan campaign, not only to remind the rest of the country what a beautiful place this is but also to remind ourselves. It would be easy, given what's happened in the last decade or so, to get discouraged. But once you get down on yourself and get depressed, that makes it all the more difficult to do what you need to do, which is work.

Economics and psychology can never be completely separated. If people feel confident, good and hopeful about their future, they're more likely to work hard, study hard and invest. If you're thinking that it's all gloom and doom, then it's much harder to make those kinds of investments in your future.

Your most recent book is titled Michigan's Economic Future: A New Look. How has your view on the state economy evolved since your 2006 book, Michigan's Economic Future? Is Michigan achieving anything measurable on reinventing the state's economy?

Neither I nor hardly any others forecast how severe the financial crisis of 2008 and 2009 was going to be. When I wrote that previous book, which was published in 2006, I thought that the next couple of years were going to be sluggish. I didn't predict that they were going to be not just sluggish, but awful.

They were just the worst (years) we've had in Michigan in a very long time, and the worst in the rest of the country since the Great Depression. So, a lot of the things that I talked about in my first book, I believe it and then some now.

In terms of what's changed from a policy perspective, not nearly as much as I would like. We've continued to slash the higher education budget. We've continued to let our public sector erode.

The last legislative session came very close to turning down half a billion dollars of federal road money because we wouldn't put up $80 million to match it. Fortunately, we finally did it. But it was like pulling teeth. If you've got a 5-to-1 match, it shouldn't be hard for you to figure out how to do that.

And in Michigan, public enemy No. 1 and No. 2 are still alive and well. I think maybe we've made some progress against them. Public enemy No. 1 is, "I don't need an education because I'm going to get one of those high-paying factory jobs." Public enemy No. 2 is, "If we just cut taxes enough; lay off enough police officers, firefighters and teachers; and if we just let enough roads, bridges, schools and parks crumble; then Michigan will attract businesses."

My perspective is that nobody likes paying taxes, but a policy of merely letting the public sector shrivel is not going to be effective.

What economists and experts do you respect the most, locally and nationally? What publications and statistics do you follow to shape your forecasts?

There are a lot of people in Michigan who I think are doing great work. One person I'd put at or near the top of the list is Timothy Bartik with the Upjohn Institute for Employment Research in Kalamazoo, who I really have a lot of respect for.

Another person I think that's done a great job is Lou Glazer (president and co-founder of Michigan Future Inc., a nonpartisan non-profit). He's really put a lot of emphasis on a highly educated and highly skilled workforce.

Jeff Guilfoyle and Craig Thiel of the Citizens Research Council of Michigan are very knowledgeable. And a lot of the economists I like are at Michigan State University, the University of Michigan and Wayne State University.

On my Internet search engine, I have bookmarked the U.S. Department of Labor, the U.S. Census Bureau and the U.S. Bureau of Economic Analysis websites. All three of those provide great data, and they provide it so you can compare Michigan with other states.